Why are average returns so hard to earn? Small-cap funds gave return of 14.8%, but investors lost 1.6%

A mutual fund may have delivered healthy returns, but that doesn’t necessarily mean its investors made the same money.

Take small-cap funds. Between March 2013 and June 2020, the category delivered a 14.8 percent CAGR, according to the September 2026 edition of DSP Mutual Fund’s Netra report. Yet, the return actually earned by investors over the same period was -1.6 percent.

That’s a gap of more than 16 percentage points. And small caps weren’t the only category where fund returns and investor returns looked very different.

How can a fund make money while investors lose?

The difference largely comes down to when the money came in.

A fund’s return measures how its NAV performed over the entire period. But investors don’t necessarily have the same amount of money invested throughout that period. They may enter after a fund has already delivered a strong run, put in more money when recent returns look attractive, and then experience the subsequent fall.

That’s why DSP also looks at investor returns, which are money-weighted. Put simply, this gives more importance to periods when investors actually had more money invested.

The result can be very different from the return shown against the fund category.

DSP’s analysis considers active regular-growth schemes, except momentum, where passive funds are also included due to the limited track record of active funds.

Small caps show how the gap gets created

The flow data makes this easier to understand.

About Rs 17,000 crore flowed into small-cap funds during the boom between March 2013 and December 2017. But another Rs 27,000 crore came in between January 2018 and June 2020, when the category was going through the bust.

So, while small-cap funds delivered a 14.8 percent CAGR across the full period, a large amount of investor money did not experience that entire journey. Much more money was invested during the later, weaker part of the period. The resulting investor return was -1.6 percent.

Technology funds tell a similar story

Technology funds offer another example.

The category had around Rs 5,000 crore in assets in March 2021 after a 100 percent-plus rally. Over the following 24 months, investors added another Rs 19,000 crore, nearly four times that amount.

In other words, a lot of money arrived after the big rally had already happened.

Between July 2019 and July 2026, technology funds delivered a 17 percent CAGR, while the investor return was only 7.6 percent, a gap of 9.4 percentage points.

The pattern is visible elsewhere too. Infrastructure funds delivered a 33.8 percent CAGR during the period studied, compared with an investor return of just 6.2 percent. Almost 75 percent of the net flows that had ever entered infrastructure funds until then came between March 2007 and March 2008.

Momentum funds also show a gap. The category delivered 15.1 percent, while investors earned 3.2 percent. Around Rs 15,000 crore flowed into momentum funds in the latest 24 months covered by the study, equal to the category’s entire AUM in July 2024.

So, what should investors look at?

The numbers highlight a simple but important point: the return shown against a mutual fund category isn’t necessarily the return its investors actually earned.

If a fund has already delivered a strong run before large amounts of money start coming in, those new investors haven’t participated in the earlier gains. Their return journey begins from the price at which they entered.

This doesn’t mean investors should avoid a category simply because it has recently performed well. But recent returns alone may not be enough reason to invest either.

The DSP data shows how easily chasing what has already done well can create a gap between fund performance and the returns investors actually take home.

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